# EBIT-EPS Indifference Point
## Meaning
The indifference point is the level of EBIT at which EPS under two different financial plans is exactly the same. Above or below this point, one plan delivers a higher EPS than the other.
## Formula
The indifference point is found by equating the EPS of the two alternatives:
$$\frac{(EBIT - I_1)(1-t) - PD_1}{E_1} = \frac{(EBIT - I_2)(1-t) - PD_2}{E_2}$$
Where:
- EBIT = indifference point (the unknown to solve for)
- E₁, E₂ = number of equity shares under Alternative 1 / 2
- I₁, I₂ = interest charges under Alternative 1 / 2
- PD₁, PD₂ = preference dividend under Alternative 1 / 2
- t = tax rate
## Decision Rule — which plan to choose?
| Condition | Choose |
|---|---|
| Expected EBIT < Indifference Point | Plan with lower fixed financial cost |
| Expected EBIT > Indifference Point | Plan with higher fixed financial cost |
| Expected EBIT = Indifference Point | Either plan (EPS is identical) |
Intuition: at higher expected EBIT levels, the firm can comfortably bear higher fixed financial cost and benefit from trading on equity; at lower EBIT levels, fixed financial cost is a burden, so the safer (lower fixed-cost) plan wins.
## When the indifference point cannot be calculated
When the number of equity shares under both alternatives is equal, AND:
1. The fixed financial cost of one alternative is always more than the other — then one plan's EPS is always greater, so the lines never cross.
2. The fixed financial cost of both alternatives is equal — then EPS is always identical under both, so there is no single crossing point.